2/05/2004 @ 7:00AM

A Pirate's Worst Enemy

Bruce
Davis
Bruce Davis
, confesses to “a little bit” of ambivalence about profitability versus revenue growth. As chief executive of
Digimarc
, number one on our list of The 25 Fastest-Growing Technology Companies, he is conflicted about whether to focus on top-line or bottom-line growth. It’s a classic dotcom-era scenario. Will Digimarc suffer the same fate as so many high-growth companies of the nineties?

Digimarc
is a leader in the nascent but promising market for digital watermarking technology, which helps track and identify unauthorized use of digital photos, audio, video and documents. A digital watermark is software code, usually invisible to the user, which is embedded into the content. The technology in and of itself won’t stop piracy. but it’s an important ingredient for, among other things, tracing leaks or spotting false identification documents.

Such technology would have come in handy in tracking down more quickly the person who illegally distributed “screener” copies of The Last Samurai.

That’s why Digimarc, of Tualatin, Ore., has been on a roll since the late nineties. The company’s revenue has grown 242%, annualized, over five years. Davis expects at least 10% sales growth in 2004, which would result in revenue of $92 million to $95 million. And he’s looking for earnings per share of between 30 and 35 cents, up from 11 cents in 2003, the firm’s first full year of profitability.

The company, which was founded in 1996, raised $80 million in a public offering in 1999. By 2000, Digimarc had caught the attention of
Macrovision
, which develops technologies for copyright protection, and the consumer electronics giant Phillips. The companies invested a total of $60 million in Digimarc, giving each about a 12% stake in the firm. Each has executives on Digimarc’s board of directors.

Although most of its early growth was organic, the company successfully digested its first big acquisition in late 2001, when it paid $56 million for the ID Systems division of Polaroid, which filed for Chapter 11 that year. That deal gave Digimarc an instant leadership position in secure ID cards. Today, Digimarc’s technology produces digital-based driver’s licenses for 32 states, as well as government IDs for the United States and other countries.

Now Digimarc is broadening its focus to all forms of digital media. Entertainment is the most fertile opportunity. Universal, a unit of
Vivendi Universal
, said it would use watermarking technology from Digimarc and others to block illegal copies of its movies and television programs from being played on supporting devices.

Davis’ resume seems a perfect fit for the industry and the task at hand. He began his career as an intellectual property attorney before being awarded 20 patents in the field of digital watermarking, electronic program guides and user interfaces.

After serving as chief executive of videogame maker
Activision
, he founded TV Guide On Screen, a joint venture between
News Corp.
and TCI that supplied electronic program guides and navigational software for cable TV. The company eventually merged with Prevue Networks, which is now part of
Gemstar
.

Despite its heady start, Digimarc is still in the early stages of development. Davis hints that Digimarc, which has $75 million in cash, is on the hunt for acquisitions in 2004. Without naming any specific companies, Davis says Digimarc is looking for businesses that will expand and diversify its distribution channels.

“Our equity investors tell us not to worry about the bottom line,” he says. “They want us to spend that money on acquisitions.” Even so, he’ll have to deal with what he concedes is a “very tough” balancing act–satisfying stakeholders Macrovision and Phillips by expanding revenues, while pleasing those shareholders who want to see the company increase its profits.